Regional specific idiosyncrasies and fiscal policy : evidence from 47 regions of the central and eastern European countries

Abstract

Purpose: The purpose of our article is to explore and study how shocks of fiscal policy are transmitted across Central and Eastern European (CEE) regions. Design/Methodology/Approach: We employ Bayesian panel VAR model to estimate and study the dynamic effects of fiscal policy on regional economic activity. Our sample of study includes 47 regions focusing on the CEE countries over the period 2001-2016. Findings: Having incorporated a possible structural break following the aftermath of the 2007 Crisis, the impulse response functions derived from the estimated models reveal cross-region variations in policy responses in terms of their magnitude and timing. Given the fact that the asymmetric effects of fiscal policy shocks across regions exist, we proceed in examining the sources of regional heterogeneities. We show that liquidity constraints, access to banking sector and participant rate in tertiary education have significant impact on regional fiscal multipliers. Practical Implications: The results have practical implication for macroeconomic policy - they show regional heterogeneities of fiscal policy effectiveness. Originality/value: The main value added of our paper is explaining heterogeneity of fiscal policy effects within the theoretical background of Ricardian and non-Ricardian households. Firstly, we are the first to show that regional fiscal multipliers depend on households’ access to banking sector. Secondly, the novelty of our paper is that we show that participant rate in tertiary education significantly decreases regional fiscal multipliers.